USDA FORECASTS BIG CROP
Prepared by Richard A. Brock & Associates, Inc.
(May 12, 2000) In some ways, Friday morning's USDA supply and demand estimates, the first for the 2000/2001 crop, were interesting and useful. In another sense they were absolutely useless. The numbers on production and carryover for corn and soybeans came in much larger than the trade had expected, primarily because USDA used trendline yields--in some cases trendline-plus. Overall, the report is viewed as negative, but by the time you read this, it will be well discounted by the market and we'll be back trading the weather. Nevertheless, some of the highlights of this report included:
1. The corn yield for this year is estimated at 137 bushels per acre, which would be the second highest in history. The peak was in 1994 when national average yields were 138.6 bushels per acre (see chart).
2. Corn carryover is pegged at 1.984 billion bushels vs. this year's 1.784 billion. This is the largest carryover since 1992, which was 2.113 billion bushels.
3. World corn ending stocks are pegged at 119 mmt vs. this year's 112.93 mmt.
4. Soybean yields are estimated at 40 bushels per acre, which is the highest since 1994 when they came in at 41.4 bushels per acre.
5. Soybean carryover for the next marketing year is pegged at 495 million bushels, the second highest in history. Carryover was 536 million bushels in 1985.
6. World carryover supplies of soybeans this year will drop from 21.62 mmt to 25.8 mmt. (2000/2001 projections are not yet available).
7. In wheat, the total U.S. production estimate is 2.239 billion bushels, the lowest since 1995 when production was 2.183 billion bushels. The winter wheat crop is pegged at 1.649 billion bushels, the lowest since 1996.
8. Carryover supplies of wheat are pegged at 837 million bushels, which is a sharp drop from last year but still the highest since the lowest carryover in 1997 at 722 million bushels.
9. World carryover supplies of wheat will drop by 13% from 125.93 mmt to 109.44 on mmt.
What Does It All Mean?
Simple. If we have excellent growing conditions for the next three months, USDA's forecast of corn and soybeans yields will materialize and prices will drop significantly. USDA is pegging new-crop corn prices to average $1.60 to .$2.00 and soybeans from $4.00 to $5.00. With December corn futures trading well above $2.50 and new-crop soybeans above $5.70, with good weather, new-crop grain prices are very overpriced.
The good news is that the bearish news is now built in to current futures price levels, which signifies that as of this stage, the market has absolutely no confidence in the USDA's projections. At the same time, these reports clearly indicate the exposure on the downside that these markets have with reasonably good growing conditions.
What is also of great interest, is that overall, the world is responding to lower commodity prices just as it responded to higher prices four years ago: With declining production. Smaller carryover supplies set up the potential for much higher grain prices longer term.
Strategies
I know we're starting to sound like a broken record but this is still a market where you need to spread risk. Currently, strict cash marketers are 60% sold in old-crop corn and soybeans and 100% sold in wheat and cotton. In the new crop, strict cash marketers have nothing sold.
For hedgers, we're sold out of old-crop corn and soybeans but re-own 25% with long July $2.60 corn calls and long July $6.25 soybean calls. Hedgers are also sold out of old-crop wheat and cotton and have no new crop sold.
There are two extreme positions that many farmers are in at this time of year. One extreme is to have nothing sold in the old crop and nothing sold in the new crop--200% long and sure that this market is going higher. The other extreme is to be 100% sold in old and 100% hedged or contracted in the new--also very extreme.
We have divided the risk by maintaining some ownership of the old crop and are waiting to sell any new crop. It is at this time of year when, assuming you have done a reasonably good job of marketing old crop as well as collecting LDP's in October, that one should be concentrating on the new crop. Seasonally, corn and soybeans should not be making their major tops until late June or early July. We're going to be looking for option strategies for hedgers to start implementing during that time frame. We'll also start doing some forward cash contracting for strict cash marketers, particularly for those of you who have to sell at harvest time. But for now, as long as the trend remains up, we want to maintain light ownership for the old crop and have no new-crop corn, soybeans, wheat or cotton sold.
May 12, 2000 Richard A. Brock & Associates, Inc. 2050 West Good Hope Road, Milwaukee, Wisconsin 414-351-5500